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Divided SEC proposes Menendez-backed rule to say more about CEO pay

SEC HQ Andrew Harrer Bloomberg.JPG

The Securities and Exchange Commission's headquarters in Washington, D.C. The commission today proposed a rule that would require public companies to disclose the pay gap between the CEO and rank-and-file workers.
(Andrew Harrer/Bloomberg)

A divided U.S. Securities and Exchange Commission proposed that public companies disclose how much more their chief executives earn than rank-and-file workers.

SEC commissioners voted 3 to 2 at a meeting in Washington today to propose and seek comment on a requirement opposed by the agency’s two Republican members and more than 20 large business lobbying groups, which say the data will be costly to compile and won’t help investors. The disclosure rule, championed by unions and some congressional Democrats, must be issued under the 2010 Dodd-Frank law.

In an attempt to make compliance less costly for companies, the SEC proposed that businesses can use sampling and estimation methods to determine the median pay of workers, according to a summary of the plan issued today. The plan doesn’t allow companies to exclude part-time workers or employees based in foreign countries from the calculation.

“The staff has drafted and recommended a proposal that would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate,” SEC Chairman Mary Jo White said.

Senator Robert Menendez, a New Jersey Democrat who wrote the Dodd-Frank provision requiring the disclosure, had warned the SEC against exempting non-U.S. employees and part-time workers. “When I wrote ‘all’ employees of an issuer, I really did mean all employees of an issuer,” Menendez wrote in a letter to the SEC shortly after the law was passed and lobbying began to shape the rule.

Total Pay

The law requires public companies to disclose their CEO’s total compensation as a multiple of median total worker pay. The law says total compensation includes salary, bonus, stock and option awards, long-term incentive pay, and change in pension value.

Menendez has said he wrote the provision to ensure that investors know whether a company’s pay practices are “fair” and whether “executives are sharing proportionately in any sacrifices.” Other proponents of the rule, including unions, say a lopsided ratio would help investors detect whether a company may have morale problems among its workforce that can affect productivity and earnings.

Business groups had urged the SEC to exclude non-U.S. employees from the proposal, saying it’s technically challenging to reconcile pay practices in other countries with U.S. disclosure rules.
Sampling Process

The use of sampling could make the process of gathering payroll data less costly and ease resistance from some business groups to the rule. The law gives the SEC discretion “to allow companies to figure out how to calculate the median,” said Vineeta Anand, chief research analyst at the AFL-CIO’s Office of Investment.

SEC commissioner, Luis A. Aguilar, said at today’s meeting that disclosure is in the best interest of shareholders, who can use the data to judge whether a CEO’s pay is commensurate with a company’s performance.

“If comparing CEO compensation solely to the compensation of other CEOs can lead to an inefficient upward spiral, then comparing CEO compensation to the compensation of an average worker may help offset that trend,” Aguilar said.

‘Shame on Us’

Commissioner Daniel M. Gallagher voted against and blasted the proposal, as did fellow Republican appointee Michael Piwowar, who joined the commission last month. Gallagher and Piwowar said the pay-ratio disclosure is designed to “shame” CEOs and said the five-member commission should not vote to propose it.

“Shame on us for letting special interests detract from our core mission,” Piwowar said.

In his first public meeting as a commissioner, Piwowar also criticized White for not delaying today’s meeting until he had more time to review the regulatory agenda.

“Chair White, I hope we can work together in the future to find ways to satisfy your personal desires to get stuff done, and our shared obligation to get stuff done right,” Piwowar said.

Proponents of the rule, including unions, say the pay ratio will be material to investors who oppose runaway CEO pay. Mandatory disclosure also would help inform shareholders on advisory “say-on-pay” votes at companies’ annual meetings, according to unions that favor the law.

Many companies already track median-pay data in order to benchmark their pay practices to competitors, Anand said. Across the Standard & Poor’s 500 Index of companies, the average multiple of CEO compensation to that of rank-and-file workers is 204, up 20 percent since 2009, according to data compiled by Bloomberg. The numbers are based on industry-specific estimates for worker compensation.

Lobbying Target

The proposal has attracted considerable lobbying in the three years since Dodd-Frank became law. SEC officials have met with a range of interest groups including the AFL-CIO, Public Citizen, Americans for Financial Reform, the Center on Executive Compensation, Johnson & Johnson, IBM Corp., and Exxon Mobil Corp.

“When you think about how many thousands of pages the Dodd-Frank law is compared to this tiny provision and the amount of outcry and noise and hand-wringing and whining, this tells you just how important this provision is to investors and how desperately companies want to do anything to not disclose it,” Anand said.

The Center on Executive Compensation, whose members include chief human-resource officers, has said sampling won’t solve all of the challenges posed by the directive. The center says it will continue to lobby Congress to repeal the provision.

Not ‘Useful’

“We don’t believe it would provide any useful information given that there is a plethora of executive compensation information out there already,” said Timothy Bartl, the center’s president.

The SEC also voted unanimously today to impose new rules on companies that provide financial advice to municipalities. The regulation, also required under Dodd-Frank, will require previously unregulated firms to register with the SEC as municipal advisers and comply with rules issued by the Municipal Securities Rulemaking Board.

The final rule exempts appointed board members of municipal governments from having to register with the SEC, according to a summary provided by the SEC. Only advice pertaining to the investment of proceeds from an issuance of securities is covered by the rule, the summary states.